Qualified MFN in Bilateral Investment Treaties – India’s Proposed Reforms

Qualified MFN Latest News

• India is considering a Qualified Most Favoured Nation provision while remodelling its Bilateral Investment Treaty framework. 

Bilateral Investment Treaties

• A Bilateral Investment Treaty (BIT) is an agreement between two countries that establishes rules for protecting investments made by investors of one country in the territory of the other.
• BITs generally address issues such as:
  • Protection against discriminatory treatment
  • Expropriation of investments
  • Fair and equitable treatment
  • Transfer of funds
  • Investor-State Dispute Settlement (ISDS)
• India adopted a new Model BIT in 2015, partly in response to concerns arising from earlier investment disputes. 
• The 2015 model adopted a more cautious approach towards investor protections, including not providing an open-ended MFN clause or a full Fair and Equitable Treatment (FET) standard.

‹ ›

About the MFN Principle

• The Most Favoured Nation (MFN) principle generally requires a country to provide investors from one treaty partner treatment no less favourable than that provided to investors from another country.
• For example, if Country A gives investors from Country B more favourable treatment under a later treaty, an MFN provision could potentially allow investors from Country C to seek similar treatment if their treaty with Country A contains an applicable MFN clause.
• India moved away from an open-ended MFN provision in its 2015 Model BIT because of concerns that investors could use provisions from treaties with third countries to make broader claims than those expressly negotiated in their own treaty.

Qualified MFN

• A Qualified MFN provision would retain the principle of non-discrimination but place specific limitations on its application.
• Instead of allowing investors to automatically claim the most favourable provision available in any third-country treaty, the provision could include safeguards specifying:
  • Which treaty provisions can be imported?
  • Whether the provision can apply retrospectively?
  • Whether settled disputes can be reopened?
  • What categories of treatment are covered?
• This approach attempts to balance investor protection with the regulatory autonomy of the State.

News Summary

• The Union Government is considering a broader restructuring of its BIT framework. The proposed reforms include Qualified MFN treatment rather than restoring the open-ended MFN rule that was removed about a decade ago.
• The objective is to address concerns of major trading partners such as the European Union, while avoiding the risks associated with allowing investors to import favourable provisions from unrelated third-country treaties.
• The approach could also provide negotiating leverage for Indian companies seeking similar treatment in major overseas markets such as the US and EU.

Changes to ISDS

• The proposed framework would reduce the domestic ISDS window from five years to one year.
• Under such a system, investors would generally be expected to pursue domestic legal remedies for one year before moving towards international arbitration.
• The proposal is intended to expedite dispute resolution, but experts have cautioned that shorter timelines would increase the importance of strengthening India’s domestic dispute-resolution institutions.

Longer Post-Treaty Protection

• The draft proposal also seeks to double the period of investor protection after expiry of a BIT from five years to 10 years.
• This could provide greater certainty to investments made under a treaty even after the treaty itself has expired.

Wider Definition of Investment

• Another proposed change is to expand the definition of “investment” to include portfolio investments and other financial assets.
• This could potentially bring certain shares and minority or portfolio holdings within the scope of treaty protection, depending on the final wording of the agreement.
• The proposal also seeks to ban third-party funding of investment-related litigation.

India’s FDI Context

• The proposed reforms come against a backdrop of declining net FDI inflows into India.
• According to the report, average annual net FDI was close to US$40 billion during FY20-FY22, but fell to approximately US$7.65 billion in FY26, based on preliminary data.
• At the same time, Indian companies have expanded their investments overseas. This combination has increased the policy focus on making India’s investment regime more predictable and competitive.

Strategic Balance

• The proposed reforms attempt to balance two objectives: making India more attractive to foreign investors while preserving the policy flexibility sought under the 2015 Model BIT.
• The EU itself has moved towards an Investment Court System model while retaining non-discrimination protections. 
• India is also negotiating around a dozen BITs, making the design of its revised framework particularly important.

Conclusion

• India’s proposed BIT reforms represent an attempt to create a more predictable investment environment without returning to unrestricted treaty protections. 
• A Qualified MFN clause could provide investors with greater protection while limiting the possibility of importing unrelated provisions from third-country treaties. 
• The success of the proposed framework will depend on the precise safeguards adopted, the strength of domestic dispute-resolution institutions and India’s ability to balance investor confidence with regulatory autonomy.

Source: IE